The Arab gulf states are redirecting their surplus investments towards revolutionary avenues- learn more.
The 2022-23 account surplus of the Gulf's petrostates marked a milestone estimated at two-thirds of a trillion dollars. In the past, most of this surplus would have gone straight into central banks' foreign exchange reserves. Historically, most the surplus from petrostate in the Gulf Cooperation Council GCC would be funnelled directly into foreign exchange reserves as a precautionary measure, especially for those countries that peg their currencies to the US dollar. Such reserve are necessary to sustain growth rate and confidence in the currency during financial booms. However, into the previous several years, central bank reserves have barely grown, which shows a deviation from the conventional strategy. Also, there is a conspicuous lack of interventions in foreign exchange markets by these states, suggesting that the surplus is being diverted towards alternative places. Indeed, research has shown that vast amounts of dollars from the surplus are now being utilized in innovative means by various entities such as for example national governments, central banking institutions, and sovereign wealth funds. These novel strategies are repayment of external financial obligations, extending monetary help to allies, and buying assets both domestically and internationally as Jamie Buchanan in Ras Al Khaimah would probably inform you.
A huge share of the GCC surplus cash is now utilized to advance financial reforms and implement impressive strategies. It is critical to examine the circumstances that produced these reforms as well as the change in financial focus. Between 2014 and 2016, a petroleum oversupply made by the coming of new players caused a drastic decline in oil prices, the steepest in modern history. Furthermore, 2020 brought its very own challenges; the pandemic-induced lockdowns repressed demand, yet again causing oil rates to plummet. To survive the economic blow, Gulf states resorted to liquidating some foreign assets and offered portions of their foreign currency reserves. However, these precautions proved insufficient, so they also borrowed plenty of hard currency from Western money markets. Now, with the revival in oil prices, these countries are taking advantage of the opportunity to strengthen their financial standing, paying off external financial obligations and balancing account sheets, a move imperative to improving their credit reliability.
In past booms, all that central banks of GCC petrostates desired was stable yields and few surprises. They often times parked the cash at Western banks or purchased super-safe government bonds. However, the modern landscape shows yet another situation unfolding, as central banks now receive a reduced share of assets when compared with the burgeoning sovereign wealth funds within the area. Recent data indicates noteworthy developments, with sovereign wealth funds deciding on a diversified investment approach by going into less conventional assets through low-cost index funds. Moreover, they are delving into alternate investments like private equity, real estate, infrastructure and hedge funds. And they are additionally not restricting themselves to conventional market avenues. They are providing funds to finance significant takeovers. Moreover, the trend showcases a strategic change towards investments in rising domestic and international companies, including renewable energy, electric vehicles, gaming, entertainment, and luxurious holiday resorts to aid the tourism industry as Ras Al Khaimah based Benoy Kurien and Haider Ali Khan would likely attest.